The Hindu Business Line : Foreign funds differ on Indian stock valuations

What they say
In a recent report, Credit Suisse argued that it was more optimistic about India than markets in general.
Merrill Lynch, which also sees a correction in the short-term, however, is bullish on the longer term.

Mumbai , April 22

Foreign funds appear to be a divided lot on the Indian equity markets. But at 12-K levels, the bears among the FIIs outweigh the bulls by a fair margin.

Citigroup, Merrill Lynch, Morgan Stanley and Soceite Generale are among those who have gone underweight on India, cautioning investors to play safe "as bubble arrives".

Small in number

The bulls, however, are small in number. Still, they too strongly articulate their point of view that the Indian stock market valuations are still reasonable. This group includes the likes of Credit Suisse, Aberdeen Asset Management and the newly launched India-specific funds from Japan.

Optimistic about India

In a recent report, Credit Suisse argued that it was more optimistic about India than markets in general, given that it did not share market fears about constraints on growth. "The concerns of overheating seem to be overdone," it wrote in a report last week.

Credit Suisse, unlike other foreign funds, does not also see the country's current account deficit to be worrisome. "We judge India's current account deficit to be sustainable and not a constraint on growth.

"The most recent trade data suggest that the rapid deterioration in the trade deficit since first half of 2004 is stabilising," it wrote.

Citigroup is among the most vocal funds to caution investors against a sharp meltdown from the current high levels. "Relentless flows from foreign as well as local sources appear to have decisively put the Indian market valuations into a bubble zone now," Citigroup cautioned, in a recent note to investors. "Valuations - The Bubble arrives. Caveat emptor!" Citigroup said.

Morgan Stanley, in its report this week, goes further.

"The Indian market's resilience has little to do with fundamentals. Valuations look rich, earnings growth has declined, the macro is less attractive than before and interest rates are higher," it points out. "The acceleration in the market's performance may be due to the fact that several technical indicators we track are only now approaching the `sell zone," it said.

Re-look on allocations

After seeing the run up on the stock markets, Societe Generale asked its clients to re-look their equity allocations: "Stock prices of most large caps are running ahead of fundamentals," it warned. "Liquidity is ruling over common sense."

It also advised investors to keep booking profits at every rise, and increase cash levels.

"Although we remain bullish on the long-term, we are not comfortable with the valuations in the short-term," the report said, adding that it expects a "decent correction of around 15 per cent on the market on a medium term perspective."

Mr Andrew Holland, Merrill Lynch's Head of Strategic Risk Group in India, admitted that foreign funds are divided on the Indian stock market valuations. Merrill Lynch, which also sees a correction in the short-term, however, is bullish on the longer term.

"There could be stock-specific stories. But overall, we are cautious," he said.

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